Decreases in the value of RRSP or RRIF investments, which may occur between the death of the plan- or fundholder and the distribution of the assets to the plans’ beneficiary, can now be carried back and deducted against the income of the deceased.

The change, proposed in the 2009 federal budget, alleviates a long-standing perceived inequity in the Income Tax Act. Although any gains in RRSP or RRIF investments are taxed in the hands of the beneficiary, no parallel mechanism has ever existed — until this proposed change — for a beneficiary to claim a loss on a decline in the value of the investments.

Tax experts are applauding the federal government’s proposal.

“It’s an excellent change,” says Jason Safar, a partner in the tax services practice of Price-waterhouseCoopers LLP in Mississauga, Ont., “very thoughtful and fair.”

“We’re delighted with the change; it was long overdue,” says Jamie Golombek, chairman of the Investment Funds Institute of Canada’s tax working group, which specifically recommended the change in its pre-budget submission. Golombek is also managing director of tax and estate planning with CIBC Private Wealth Management. Both organizations are based in Toronto.

When the holder of an RRSP or RRIF plan dies, the plan or fund can be rolled over to a surviving spouse or common-law partner on a tax-free basis. When an individual dies without a surviving spouse, the RRSP or RRIF faces a “deemed disposition” and the fair market value of investments held in the plan or fund at the time of the death is included in the deceased’s income in the year of death.

A subsequent increase in the value of investments in the RRSP or RRIF is generally included in the income of the beneficiary of the registered plan or fund upon distribution.

Until the proposed change, however, there was no provision in the ITA to recognize a decrease in the value of RRSP or RRIF investments. With the change, an amount equal to the difference between the value of the investments that were included in the income of the deceased in the year of death and the total of all amounts paid out to the beneficiary can be carried back and deducted against the RRSP or RRIF income inclusion in the deceased’s final tax return.

For example, under the existing rules, an RRSP or RRIF that held investments valued at $100,000 at the time of the plan- or fundholder’s death would be included in the deceased’s terminal tax return as $100,000 of income; taxes would be due on that amount. If the registered plan was held up pending distribution — a process that often takes months — and the value of the investments fell, for example, to $60,000, the beneficiary had no recourse to regain any of the taxes paid on the $40,000 lost.

The federal government’s decision to make this change now — a change for which tax practitioners have been asking for years — was probably motivated by the fact that equities markets took such a severe drubbing last year.

“The change will be particularly helpful for beneficiaries when the deceased died in the latter part of 2008, when the markets were in free fall,” says Paul Hickey, a tax partner with KPMG Inc. in Toronto. “That’s what really brought this issue into focus for the government.”

The proposed measure will apply only to investments held in RRSPs or RRIFs of deceased plan- or fundholders for which the final distribution from the RRSP or RRIF occurs after the 2008 calendar year.

“If the distribution occurred in 2008 or before,” Hickey says, “you’re out of luck.” IE



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